Over the past four years, the common stock of Jess Electronics Co. produced annual returns of 7.2, 5.8, 11.2, and 13.6 percent, respectively. Treasury bills produced returns of 3.4, 3.3, 4.1, and 4.0 percent, respectively over the same period. What is the standard deviation of the risk premium on Jess Electronics Co. stock for this time period?
A)2.23%
B)2.86%
C)3.22%
D)4.46%
E)4.61%

Question

Quizplus · Accepted Answer

The risk premium is the difference between the stock returns and the Treasury bill returns for each year. Calculate the risk premiums for each year, find the average, and then compute the standard deviation of these premiums. The correct standard deviation is 3.22%.

Over the Past Four Years, the Common Stock of Jess